Via JPM:
There is still extreme crowding in defensive styles and momentum that we illustrated in our previous reports. An additional illustration is shown in Figure 1 below. It shows two strategies that in theory should have little to do with each other: one is equity long-short selection of winning/momentum stocks (momentum factor) and the other is CTA macro investing that doesn’t even hold any individual stocks, but rather mostly fixed income instruments. One can see that recently they are nearly 100% correlated. This is yet another indication of the prevalence of groupthink and crowding across investment strategies. The most recent crowding episode was largely driven by bond yields, and fears of the trade war impact and recession. A similar level of crowding can be illustrated by the performance of small-large factor and value equity factor. In theory these should be uncorrelated, but they are effectively one and the same, and they are just the inverse of the previously described momentum strategies. Our view is that the best hedge for a continued unwind of this investment groupthink is to overweight deep cyclicals like energy, metals/mining, as well as small cap stocks.
Finally, we anticipate that clients will ask if increasing yields will at some point derail equities and this cyclical rotation. Our view and analysis suggest that yields can increase another ~150 bps before they become a potential problem, and that rising yields will only accelerate the upside in cyclical and value stocks as they reflect improving economic conditions.
